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Hot stock: AWE

Greg Smith

What's new Oil and gas player AWE has had some good news recently that will be welcomed by long-standing shareholders after a challenging few years.

December-quarter production increased 33 per cent during the previous quarter to hit 1.3 million barrels of oil equivalent.

A key driver was the resumption of production at a project in the Bass Strait after a 10-month shut-in. BassGas contributed 389,000 barrels of oil in the past quarter, making up about 29 per cent of total production for the period.

AWE is a 46.25 per cent shareholder in BassGas and the joint venture will decide timing for the next stage of the project in the middle of 2013.

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Production at the company's shale gas project in Texas was also higher. Output at the Sugarloaf AMI project increased from 118,000 to 145,000 barrels in the December quarter, as 12 additional wells came online.

Outlook AWE is seeking partners for its 100 per cent-owned oil project off Indonesia. Ande Ande Lumut was acquired in February 2012 and management estimates there are gross recoverable resources of 76 million barrels.

With plans for a final investment decision on the project in the second half of 2013, AWE is seeking to sell down its interest by up to 50 per cent. This will reduce its share of capital expenditure should the project go ahead. Management appears confident there will be plenty of interest in the sale.

The company also has a 50 per cent stake in the Senecio tight gas project, in Western Australia's Perth Basin. The company estimates resources for its 50 per cent stake in the project at 4.4 million barrels equivalent, or about 50 billion cubic feet of wet gas. A feasibility study is being conducted and AWE might be able to use nearby infrastructure.

Price AWE's stock price has been in the doldrums, down 18 per cent during the past six months, due mostly to the well-documented productions hiccups at BassGas.

But since the company released its quarterly report in January, its stock has surged as the market has become more comfortable that problems at the BassGas project are behind it.

Worth Buying? The stock trades at well above 20 times earnings estimates. However, we are encouraged by the production resumption at BassGas, as well as the progress of AWE's other assets.

We believe the collective value of these assets is not adequately reflected in the stock price, which is trading at a 15 per cent discount to its net asset value.